The OTC is connecting digital assets and corporate investors
Investors seek crypto assets for diversification and protection against inflation. Crypto OTC transactions offer advantages and privacy.
The number of institutional and business investors eying these investments in crypto assets expansion has escalated in the same way these investments grow. It has been possible to observe this trend since 2018. In light of the evolution of digital assets, EINs (Employer Identification Number) may get even closer to this market.
The many advantages of cryptocurrency investments are inducing this scenario. Diversification of the wallet, non-correlation of assets, and alpha positions in the portfolio are what we can mention, but also access to decentralized markets, alongside protection against inflation.
Cryptocurrency investments by institutional and corporate investors are made Over The Counter (OTC). The transactions, in crypto OTC format, are more advantageous and take place out of the public eye, apart from the bid book.
Corporate investors: who are they?
Firstly, it is worth clarifying who institutional investors, large corporations in the financial market, manage investments for other companies or individuals. They are investment managers, banks, brokerage houses, investment funds, family offices, and capitalization entities.
The company must register with a regulatory entity to get this classification - in the USA, this institution is SEC (Securities and Exchange Commission). The company, withal, will need to define an investment policy and a structuring compliance sector, responsible for ensuring that the requirements are according to the regulatory entities.
Nonetheless, there are international corporate finance departments, which are commodiously responsible for the investment decisions taken by the company. They strive for less risk for the business, they also must deal with high-asset positions and take responsibilities to ensure more income.
The search for the best portfolio
Institutional investors and corporate treasuries share common goals concerning the construction of investment portfolios. Generally speaking, they seek portfolio diversification, which means investing in different assets, navigating through lower and higher risk, low and high-yield investments.
There are still two main factors for corporate investors: the search for alpha positions and the struggle to build a portfolio of uncorrelated assets.
Alpha positions are the yields that exceed the market indexes. They are different from betas positions, calculated from indices such as the S&P 500 Index. In the investment calculations, these two positions separately calculated are meant to assemble an alpha-beta portfolio for these investors to add more alpha actives and minimize the risk of hefty losses.
Asset correlation, on the other hand, refers to how assets are interlinked. The currency used for the investment calculation is a clear example of it. Imagine your wallet has several assets in its composition linked to the dollar when the currency evaluates, so does all your income. If you had diversified your portfolio, this would not happen had you linked your income to both dollar and bitcoin, considering they are uncorrelated assets.
The role of crypto-activists
Corporate investors and other giants of the financial market who have faith in digital assets view them as a path to the ideal portfolio. They are also the gateway to the digital evolutions that have taken place in the financial market since the genesis of bitcoin.
El Salvador has adopted Bitcoin as one of its official currencies, which has boosted the local economy and attracted international attention. The DeFi (Decentralized Finance), in its path for the decentralized market, with NFTs (non-fungible tokens), whose use has served for large online purchases/sales using cryptocurrencies, and liquidity pools, for instance.
Venturing into cryptocurrencies, especially bitcoin, is also a way to hedge against inflation, a benefit that both small and large investors crave. Several issues can cause inflation, such as an increase in demand and a decrease in supply, but the over-issue of money is one of the most devastating effects. Scarce assets, like bitcoin, do not face this problem, said production has a limit. Such a reason is why people compare them to gold.
The weakening and devaluation of the currency weigh on the purchasing power and yield of the investment portfolio. Bitcoin suffers deflation, the opposite of inflation. Regarding bitcoin, things get cheaper over time, and the value of the currency goes up.
By combining all these factors, corporate investors get even more attracted to the digital asset market. These investors buy and sell crypto actives through OTC Tables, an easy and private route. The ease of transacting larger volumes with reduced fees, more advantageous pricing, and access to rarer cryptocurrencies are among the advantages of OTC. Check out this session on OTC and understand how over-the-counter transactions work.